Key takeaways
- DSCR = NOI ÷ annual debt service. Debt yield = NOI ÷ loan amount. LTV = loan ÷ value.
- The lender applies all three and lends the smallest amount that passes every test.
- In the example below, a 10% debt yield and 75% LTV both pass, but DSCR comes in at 1.18x. At a 1.25x minimum, the loan shrinks by about $68,000.
- Rate changes move DSCR. Debt yield ignores the rate. That's why lenders use both.
The three tests
DSCR = NOI ÷ Annual debt service
Debt yield = NOI ÷ Loan amount
Loan-to-value (LTV) = Loan amount ÷ Property value
DSCR asks whether the property's income covers the payment, with a cushion. A 1.25x DSCR means NOI is 25% more than the annual payment.
Debt yield asks what return the lender would earn on the loan amount if it took the property back. It ignores the interest rate and amortization, which makes it hard to game with loan terms.
LTV asks how much equity sits below the loan.
Minimums vary by lender, property type, and market. Stabilized commercial loans commonly require a DSCR in the 1.20x to 1.35x range. Ask your lender for its actual thresholds before you underwrite.
Worked example
A property with $120,000 of NOI and an appraised value of $1,600,000. The buyer asks for a $1,200,000 loan at 7.00% interest with a 25-year amortization.
| Test | Calculation | Result |
|---|---|---|
| Monthly payment | $1,200,000 at 7.00%, 300 months | $8,481 |
| Annual debt service | $8,481 × 12 | $101,776 |
| LTV | $1,200,000 ÷ $1,600,000 | 75% |
| Debt yield | $120,000 ÷ $1,200,000 | 10.0% |
| DSCR | $120,000 ÷ $101,776 | 1.18x |
Illustrative example. Hypothetical numbers chosen to show the math. Your property's numbers will differ.
If the lender requires 1.25x, the maximum annual debt service is $96,000 ($120,000 ÷ 1.25), or $8,000 a month. At 7.00% over 25 years, that payment supports a loan of about $1,131,900. The buyer needs roughly $68,000 more equity, even though LTV and debt yield pass.
Why rates matter to DSCR and not to debt yield
Raise the rate and the payment rises, so DSCR falls. Debt yield doesn't move, because it only compares NOI to the loan amount. In a rising-rate market, DSCR usually becomes the binding constraint. In a low-rate market, debt yield and LTV often bind first.
What this means for buyers and owners
- Size the loan before you write the offer. The equity requirement can change with the rate.
- If you own a property with a loan maturing in the next few years, test today's DSCR at today's rates. A refinance may produce less proceeds than the existing balance.
- Use underwritten NOI, the same number the lender will use. See NOI explained.
- Owner-occupied properties may qualify for SBA programs with different structures. See SBA 504 and 7(a).
Common questions
What is a good DSCR for a commercial loan?
Lenders set their own minimums. Stabilized commercial loans commonly require 1.20x to 1.35x, with higher requirements for riskier property types. Confirm the exact threshold with your lender.
What is debt yield?
Debt yield is NOI divided by the loan amount. A $120,000 NOI on a $1,200,000 loan is a 10% debt yield. It measures the lender's return on the loan if it had to take the property back, regardless of interest rate.
Which test usually limits the loan?
Whichever produces the smallest loan. When interest rates are high, DSCR often binds. When rates are low, LTV or debt yield often bind.
General information, not legal, tax, accounting, or investment advice. Examples marked illustrative use hypothetical numbers.